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    An Aviator Stuntman and the Stimulus

    Sep 28 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Government, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 578 Views

    You’ve probably never heard of Lincoln Beachey.

    An aviation pioneer, Beachey flew at the beginning of the 20th century. During one of his first air exhibitions, Beachey did something totally terrifying when his plane stalled. The opposite of what anyone had ever done before, he counterintuitively turned his plane into the spin and pointed its nose downwards. Reversing a deadly nosedive, he landed safely.

    Hearing about Lincoln Beachey on a Radio Lab podcast, I thought of February 2009. With the economy nosediving, the President proposed and the Congress approved a massive injection of stimulus money. A seemingly logical maneuver, it appears not to have had the impact that many of us expected.

    Are we responding like Lincoln Beachey’s predecessors who turned away from the spin and pointed their noses upward? Or does the intuitive response work and we just need more?

    The Economic Lesson

    One group of economists describes the American Jobs Act as the additional stimulus we need. Seeing the money directed toward job creation, infrastructure projects and payroll tax cuts, a second group of economists says it is a repeat of the failed 2009 stimulus program.

    As with Lincoln Beachey, we seem to have a group that believes the logical sounding Keynesian approach will work and a second group saying, if we look more closely and think like Friedrich Hayek, we would see it is profoundly flawed.  You might enjoy looking at the Keynes/Hayek rap debates here.

    An Economic Question: Is your bias toward more or less government economic intervention. Explain.

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    Moneyball Economics

    Sep 27 • Businesses, Demand, Supply, and Markets, Economic Thinkers, Financial Markets, Innovation, Labor, Thinking Economically • 2394 Views

    A wonderful baseball movie, Moneyball is also about economics.

    The story focuses on the Oakland Athletics, a second-tier baseball team with a small budget. A speedy runner? A homerun hitter? The stars cost many millions that Oakland just did not have.

    Faced with a futile future, the Athletics general manager, Billy Beane, realized a good team need not be about star players. Instead of individuals, it was actually about the whole team’s ability to win. And that meant looking more closely at why teams win. Beane concluded that it meant getting on base. And that meant walking was as valuable as hitting. It meant recognizing the small stuff that most people ignored.  It required processing countless stats and avoiding the human response on which baseball scouts depended. And it worked.

    Listening to the “bean counters,” Beane put together a team of unknowns that together almost produced a championship.

    In this fascinating NPR Fresh Air podcast, Michael Lewis talks about his book Moneyball.

    The Economic Lesson

    In the stock market, when buying a house, or when putting together a baseball team, price matters. People who identify a resource that is undervalued have the best chance of achieving success. For securities and home buyers, success means prices rise after you buy your asset. For Billy Beane, it was acquiring valuable players for a price he could afford.

    This returns us to the role of prices. Prices convey information. Sometmes, though, goods and services are mispriced. Then, very wise people can benefit before the market realizes its mistake.

    Billy Beane soon faced the problem that his undervalued players would gain value. And then, again, he could not afford them.

    An Economic Question: In addition to undervaluing an asset, sports economists have said that Moneyball is about Joseph Schumpeter’s creative destruction. Do you agree? Explain.

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    Tweet Rights

    Sep 26 • Businesses, Innovation, Regulation, Thinking Economically • 639 Views

    • Does “Nutcracker Tweet” bird seed have the right to Tweet?
    • Is it okay to name your birdhouse firm “Tweet Tweet Home?” 
    • Can your app say Tweet?

    It all depends on the US Patent and Trademark Office.

    Twitter wants the tweet trademark. It is suing Twittad to get it. Here is the story at techcrunch.

    The Economic Lesson

    Whether looking at Louboutin’s red soles, music copyrights, or a tweet trademark, business firms like exclusivity. Think of a competitive market structure continuum in which perfect competition is at the far left and monopoly is at the other end. Moving firms away from a perfectly competitive market structure where products are identical or similar, exclusivity takes them closer to oligopoly and monopoly. As firms move to the right on the scale, they gain greater control over their identity, pricing, and how they will communicate with consumers.

    An Economic Question: The US Patent and Trademark Office told shoe firm Louboutin that it had no exclusive right to its red soles while Tweet can be trademarked. Explain why you think the decisions differ.

     

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    Congressional Deficit “Games”

    Sep 25 • Behavioral Economics, Government, Macroeconomic Measurement, Thinking Economically • 655 Views

    Composed of 6 Democrats and 6 Republicans, the congressional super committee is supposed to create a deficit reduction plan. If they do not propose the plan or if Congress does not approve their plan, then automatic cuts are triggered. The automatic cuts include policies that each party opposes.

    As talks unfold, the Republicans could wind up with either:

    1. Continued tax cuts and less spending
    2. Compromise on deficit reduction
    3. Automatic cuts

    Meanwhile, the Democrats could wind up with either:

    1. Continued entitlement spending and tax increases
    2. Compromise on deficit reduction
    3. Automatic cuts

    #1 is best for each one but tough to achieve. #2 is the compromise. #3 is the disaster.

    The Economic Lesson

    Sounds like the super committee is facing the prisoners’ dilemma.

    Imagine for a moment 2 prisoners who were just arrested. Interrogated by police in separate rooms, each prisoner wants to minimize jail time. The problem is that each one’s fate depends on what the other prisoner does. And, neither knows the other’s strategy.

    1. The best alternative is to confess, incriminate the other prisoner and get a suspended sentence but that works only if the other prisoner remains silent.
    2. Another alternative is to remain silent and get a brief jail term. But then both need to say nothing.
    3. Finally, if both confess, then they each receive a very long jail term.

    Like the super committee, #1 is best for each one but tough to achieve. #2 is the compromise. #3 is the disaster.

    An example of economic game theory, the prisoners’ dilemma involves strategizing against a second party that has the power to affect the consequences of your decisions.

    Game theory has been called the economics of cooperation (or non-cooperation). Whether looking at disarmament negotiations, Pepsi and Coke or Democrats and Republicans, the basic strategic patterns are similar. John Nash won a Nobel Prize for his research about Game Theory.

    Here, NPR Planet Money called the super committee negotiations a game of chicken.

    An Economic Question: How might Coke’s and Pepsi’s decisions resemble the prisoners’ dilemma?

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    A “Jersey Shore” Controversy

    Sep 24 • Businesses, Economic Debates, Economic Humor, Government, Labor, Macroeconomic Measurement, Thinking Economically • 591 Views

    Called the “Snooki subsidy,” the firm that produced MTV’s “Jersey Shore” just received a $420,000 tax credit from the NJ Economic Development Authority. The purpose? New Jersey hopes to encourage business investment. The problem? Snooki.

    The Economic Lesson

    The controversy, though, also extends far beyond Snooki. It takes us to questions about state finance and economic development.

    Citing budget problems, NJ Governor Christie suspended his state’s Development Authority tax credit program in 2010. And, according to the Wall Street Journal, certain states have had to deal with film company expense fraud and problems when firms resell tax credit vouchers. On the other hand, described here in econlife, producing Law & Order in NYC created a substantial ripple of spending.

    The bottom line? Generating extra revenue and encouraging economic development is more complex than it appears.

    The Economic Question: Explain a hypothetical ripple of spending that film production could initiate.

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